The thought “one company’s cost savings are another company’s lost revenue” below offers interesting economic insight:
{ On Private Equity: Scott Schoen, THL }
http://randomjunkyramblings.blogspot.com/2009/04/on-private-equity-scott-schoen-thl.html
As I have pointed out in this blog based on Shiller’s and Stiglitz’s articles, “sentiment”/ “perception” and other such “soft” or “behavioral” aspects play an important part in the economic engine of a region: {Financial Transactions, Trust and Keynesian "Animal Spirits"} & {Financial Markets, Economic Crises And Global Co-ordination}
http://randomjunkyramblings.blogspot.com/2009/01/financial-transactions-trust-and.html
Economic contraction would lead to a destruction of value through the destruction of existing market players, structures and relationships, before the economic engine restarts. This may lead to a slower recovery. This can be a good rationale for a central bank investing in an economy to keep it afloat in such a way.
However, once we accept that “sentiment” is a factor in the economic engine; could the effort to maintain existing market players, structures and relationships also impact the incentives for the economic engine to generate lasting recovery?
What do you think?
Sunday, May 31, 2009
Microeconomics, Synergies and Operational Portfolio
A case discussion link below would give you background perspective on this post { Private Equity Case: Dialogic Carve Out from Intel}:
http://randomjunkyramblings.blogspot.com/2009/02/private-equity-case-dialogic-carve-out.html
Synergies
I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?
His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.
Microeconomics
However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?
Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor
Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?
The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}
http://randomjunkyramblings.blogspot.com/2009/02/panel-venture-capital-if-it-aint-broke.html
Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.
How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2009/02/private-equity-case-dialogic-carve-out.html
Synergies
I checked with a technology industry focused private equity investor on whether his investment committee considers synergies across its operational portfolio in its investment decision making. After all, technology is a pretty broad term- do they see an advantage in narrowing their focus?
His rejection of the idea was couched in an excellent example. The investment team would not buy competitors. This was a pretty straight forward discounting of the potential of merger efficiencies, and we can list numerous reasons for it- from strategic ones like the hypercompetitive nature of the technology industry, to investment ones like the heightened risk of a larger company’s underperformance weighing down upon the rest of the portfolio.
Microeconomics
However, this should remind you, as it reminded me, of microeconomics. Does rejecting competitors also mean you would reject complements? Strictly as an investment strategy, wouldn’t investing in complements also increase the correlation across investments?
Investment examples in the technology industry would be:
1. Investing in Facebook and Fun Wall, or investing in Twitter and Twitterdeck.
2. Investing in the Transmeta Crusoe process and a windows power management utility for that processor
Would this mean that the investing team needs to have processes in place to monitor revenue correlations across portfolio companies?
The Venture Capital Context
Lets look at this in the venture capital context, discussed in my post here: {Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?}
http://randomjunkyramblings.blogspot.com/2009/02/panel-venture-capital-if-it-aint-broke.html
Investing in startups, especially the very early stage ones, needs to account for some strategy shift. However, sometimes even late stage startups may need to adjust their strategy to account for monetization opportunities in tough economic times.
How would the venture capital firm react if this strategy shift made this investment a complement of anther portfolio investment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
US Consumer Confidence, Economists' Optimism, and the Economy.
Chatting with a brand manager at a Consumer Goods/ Beverages company recently, I got the sense that the consumer was focused on value and was still buying. So I took another look at the news to put the conversation in perspective:
A. Did someone say "green shoots"?
1> US consumer confidence reports has interesting, and intriguing numbers, this week:
http://www.bloomberg.com/apps/news?pid=20601068&sid=aYRGnAW70og8&refer=home
2> Economists are turning optimistic about the economy as well:
http://news.yahoo.com/s/usnews/20090506/ts_usnews/economistsoptimisticaboutuseconomy
3> Even Roubini has mentioned that we are in the trough phase of the U shaped recession. While he still stands by the possibility of a "perfect storm" in 2010, I am inclined to call this positive news.
B. Are we there yet?
For contrast to the signs of Spring we see above:
1> Dr. Altman recently demonstrated, backed by research, that corporate defaults had hit 8 percent in January.
2> He also pointed out that many creditors are in no position to take companies through a bankruptcy.
3> Additionally, on the consumer front, credit card defaults are still a concern.
Now that we have a contrast between most economists and Doctors Doom and Gloom, what does the impressive rise in consumer confidence mean? 70% of the economy is consumption- so a rise in consumer confidence may, at best, be good news in the short term. So, based on this recent news, we seem to have the right economic tools at work to "salvage" the situation and those tools seem to be having an effect.
However, I still think of this as a zero sum game when it comes to investing (bailout) in pulling the economy from the brink. Here are some thoughts:
1> In 2001, the US government took some steps to "salvage" the situation, that eventually led us to 2008. What are economists suggesting needs to be done to prevent us from ending up in an downward spiral of increasingly severe recessions? Could Roubini's W shaped "perfect storm" really be plain old speculation about "when", not "if", the next storm lands at out doorstep?
2> How will the world pay for this? Could an effect show up in international finance, where some countries pay more for this rebound that others?
While I hope economists continue to huddle to figure out options and tools that will solve some of the problems, these questions give you the context to make decisions that steer you and the enterprise through the storm.
What will you do?
P.S. This note is based on a post on a macroeconomics forum on the morning of 05/31/09.
I later found some interesting articles that provide more structured and well thoughtout arguments. The leader here is Nouriel Roubini:
http://www.forbes.com/2009/05/20/depression-recession-green-shoots-housing-jobs-opinions-columnists-nouriel-roubini.html
Also, Fareed Zakaria's GPS episode, dated 05/31/09, will give you more food for thought, besides the added bonus of seeing Kissinger talk about US options in NE Asia.
A. Did someone say "green shoots"?
1> US consumer confidence reports has interesting, and intriguing numbers, this week:
http://www.bloomberg.com/apps/news?pid=20601068&sid=aYRGnAW70og8&refer=home
2> Economists are turning optimistic about the economy as well:
http://news.yahoo.com/s/usnews/20090506/ts_usnews/economistsoptimisticaboutuseconomy
3> Even Roubini has mentioned that we are in the trough phase of the U shaped recession. While he still stands by the possibility of a "perfect storm" in 2010, I am inclined to call this positive news.
B. Are we there yet?
For contrast to the signs of Spring we see above:
1> Dr. Altman recently demonstrated, backed by research, that corporate defaults had hit 8 percent in January.
2> He also pointed out that many creditors are in no position to take companies through a bankruptcy.
3> Additionally, on the consumer front, credit card defaults are still a concern.
Now that we have a contrast between most economists and Doctors Doom and Gloom, what does the impressive rise in consumer confidence mean? 70% of the economy is consumption- so a rise in consumer confidence may, at best, be good news in the short term. So, based on this recent news, we seem to have the right economic tools at work to "salvage" the situation and those tools seem to be having an effect.
However, I still think of this as a zero sum game when it comes to investing (bailout) in pulling the economy from the brink. Here are some thoughts:
1> In 2001, the US government took some steps to "salvage" the situation, that eventually led us to 2008. What are economists suggesting needs to be done to prevent us from ending up in an downward spiral of increasingly severe recessions? Could Roubini's W shaped "perfect storm" really be plain old speculation about "when", not "if", the next storm lands at out doorstep?
2> How will the world pay for this? Could an effect show up in international finance, where some countries pay more for this rebound that others?
While I hope economists continue to huddle to figure out options and tools that will solve some of the problems, these questions give you the context to make decisions that steer you and the enterprise through the storm.
What will you do?
P.S. This note is based on a post on a macroeconomics forum on the morning of 05/31/09.
I later found some interesting articles that provide more structured and well thoughtout arguments. The leader here is Nouriel Roubini:
http://www.forbes.com/2009/05/20/depression-recession-green-shoots-housing-jobs-opinions-columnists-nouriel-roubini.html
Also, Fareed Zakaria's GPS episode, dated 05/31/09, will give you more food for thought, besides the added bonus of seeing Kissinger talk about US options in NE Asia.
Thursday, April 30, 2009
A Classical & Fusion Concert at Carnegie Hall
I attended an Indian Classical & Fusion concert at Carnegie Hall earlier this year. A review of a concert in the series can be found here:
http://www.nytimes.com/2009/05/01/arts/music/01huss.html
My reaction to the concert: I was blown away.
I will admit to being a little starved of good classical performances of any sort for while, let alone live Indian classical. For someone with an untrained ear, I was really counting on flashes of brilliance from the performers to (re)capture my interest. A bit like a how an impossible volley at a crazy angle reminds you how much fun watching a Wimbledon final can be. Based on the names performing, I knew there would be at least a few flashes of brilliance.
The concert was all brilliance AND class. It was like being touched by God. It displayed Masters on top of their game, completely immersed, and reveling, in their trade. It was humbling, as all great displays of skill are, but I felt more like a wide eyed kid in a candy store.
The power of music! The patterns within a musical piece! The patterns within the music of the individual performers! The story that the interplay of instruments in a piece tell you and the story that a sequence of pieces tell you! Wow!
Like a little piece of art you like a little more than others, it even found a little bit of me to connect with. All this coming from an ear as untrained as mine.
I blame it all on the performers.
My jaw still drops (scrapes the floor, really) every time I think about the evening.
http://www.nytimes.com/2009/05/01/arts/music/01huss.html
My reaction to the concert: I was blown away.
I will admit to being a little starved of good classical performances of any sort for while, let alone live Indian classical. For someone with an untrained ear, I was really counting on flashes of brilliance from the performers to (re)capture my interest. A bit like a how an impossible volley at a crazy angle reminds you how much fun watching a Wimbledon final can be. Based on the names performing, I knew there would be at least a few flashes of brilliance.
The concert was all brilliance AND class. It was like being touched by God. It displayed Masters on top of their game, completely immersed, and reveling, in their trade. It was humbling, as all great displays of skill are, but I felt more like a wide eyed kid in a candy store.
The power of music! The patterns within a musical piece! The patterns within the music of the individual performers! The story that the interplay of instruments in a piece tell you and the story that a sequence of pieces tell you! Wow!
Like a little piece of art you like a little more than others, it even found a little bit of me to connect with. All this coming from an ear as untrained as mine.
I blame it all on the performers.
My jaw still drops (scrapes the floor, really) every time I think about the evening.
Sunday, April 05, 2009
Is Private Equity The American Industry that protects American Enterprise?
Here’s a potential title for future historians to consider for the Private Equity industry in this decade:
Flush with liquidity, which you could call a “Greenspan Blessing”, the Private Equity industry, a truly American Industry, invested over a trillion dollars into American enterprises that were/ are strategic players in their industries, protecting them from a future downturn that would make many vulnerable to hostile takeovers from international buyers.
My thoughts went down this path thanks to a question posed by David Rubenstein from the Carlyle Group.
While lobbyists in D.C. would be salivating at this spin- the idea behind the headline is to answer David's question on the Private Equity industry's place in the economy.
I have an answer that's more an essay, however, I am sharing below some questions that I structured to effectively, and comprehensively answer David's question. Hope this helps you in understanding the Private Equity industry better.
Back to our headline- does it really make sense?
1> Would America’s rebound from the downturn have to lag that of other economies (discounting the opportunities for Brazilian, Chinese and Indian companies) for this to even be a potential story?
2> Can we prove the industry’s deal making and execution can have this unintended, headline making, consequence?
3> Could this unintended consequence have happened as an explicit strategy to protect, store and manage American value? Would this strategy have worked if it were run by the American government?
4> Given America’s history and promise as the land of reinvention and rejuvenation, does this unintended consequence or strategy make sense? Specifically, why save and protect when failure makes you better and stronger?
5> Or couldit truly be an example of reinvention and rejuvenation?
6> Can the Private Equity industry even be called a truly American industry? Could we truly say "Only in America!"?
How would this trend of over a trillion dollars in Private Equity investment have worked out during the 1981-82 recessions? Are the market structures today substantially different than they were in 1981 for the comparison to be odious?
While I have an opinion and can weave a story…
What do you think?
Flush with liquidity, which you could call a “Greenspan Blessing”, the Private Equity industry, a truly American Industry, invested over a trillion dollars into American enterprises that were/ are strategic players in their industries, protecting them from a future downturn that would make many vulnerable to hostile takeovers from international buyers.
My thoughts went down this path thanks to a question posed by David Rubenstein from the Carlyle Group.
While lobbyists in D.C. would be salivating at this spin- the idea behind the headline is to answer David's question on the Private Equity industry's place in the economy.
I have an answer that's more an essay, however, I am sharing below some questions that I structured to effectively, and comprehensively answer David's question. Hope this helps you in understanding the Private Equity industry better.
Back to our headline- does it really make sense?
1> Would America’s rebound from the downturn have to lag that of other economies (discounting the opportunities for Brazilian, Chinese and Indian companies) for this to even be a potential story?
2> Can we prove the industry’s deal making and execution can have this unintended, headline making, consequence?
3> Could this unintended consequence have happened as an explicit strategy to protect, store and manage American value? Would this strategy have worked if it were run by the American government?
4> Given America’s history and promise as the land of reinvention and rejuvenation, does this unintended consequence or strategy make sense? Specifically, why save and protect when failure makes you better and stronger?
5> Or couldit truly be an example of reinvention and rejuvenation?
6> Can the Private Equity industry even be called a truly American industry? Could we truly say "Only in America!"?
How would this trend of over a trillion dollars in Private Equity investment have worked out during the 1981-82 recessions? Are the market structures today substantially different than they were in 1981 for the comparison to be odious?
While I have an opinion and can weave a story…
What do you think?
Private Equity Firms and Large Company Acquisitions
Richard Friedman’s key factors for Private Equity funds targeting large companies- financing, downturn lag effects and compensation limits on management, listed here
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
http://randomjunkyramblings.blogspot.com/2009/03/6-private-equity-firms-and-large.html
- lead to a host of follow up questions.
Are the public capital markets more imperfect than perfect at corporate governance? In more cases than not, have capital markets been reduced to purely reflecting the underperformer reality of a large company as opposed to packing the bite that enforces change? Fragmented ownership is a factor. But is that it? There are numerous cases of an activist investors that have not met their primary objectives (I am not talking about activist investors whose primary objective is greenmail).
If we look at Friedman’s 3 points, and buy the fact that no team can consistently beat economic headwinds to provide massively outperforming returns, would you call private equity firms spectacular market timers? Gives you a simple screen- find a lag effect, and find a management team that’s already furiously at work to beat it, incentivize it to keep the boat steady, and voila! outperformer returns!
Consistent market timing? Really? A simple screen provides outperformer returns? Consistently?
Now, running a large enterprise that is suffering lag effects of a downturn takes some skill. At the simplest level, the private equity investor can certainly simulate an activist investor and provide senior management the backing it needs to rechannel energies from quarter to quarter window dressing into initiative that dovetail with the exit time frame. The private equity takeover can function as the step change that galvanizes the organization into focusing, even functioning as a hedgehog focused on a target.
Even these “operational improvements” count on:
existing management’s ability to direct, or shake up, existing relationships, or,
the investor’s ability to bring in people that can achieve the investor’s objectives.
Contingent upon incentives working, once the deal is struck, execution patterns and outcomes similar to Post Merger Integration efforts should dominate.
Stepping back, what are the patterns and markers that a private equity investor can use to manipulate the trade offs across financing, directed human capital (read operational improvements), and macroeconomic conditions to achieve outperformer returns?
The question’s underlying axiom is obvious; it is possible, with some consistency, to provider outperformer returns. You now also have a rudimentary structure (dare I say a quant model? :-)) to value the impact of these three components on final returns.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, April 04, 2009
Panel: Creating Value through Operational Improvements
The panel discussion kick-off reminded me of a simple brand equity value chain, noted below in a slightly modified manner: look at the market for size and value, and work your way inward into the organization into the capital structure, evaluating improvements at each step.
To tackle the question of creating value in the current economic context, the panelists considered various tactics like evaluating the purchasing power of the customer, to benchmarking various activities of the organization. This can lead to evaluating options like changes to distribution strategy, or even product rationalization.
A Managing Director at Fenway Partners, who has been through the 2001-02 downturn, pointed out that you may save capital, but you are then faced with the challenge of deploying it.
He ventured three capital deployment options- buy debt at a discount, invest in organic growth by looking at operational investments, and invest in equity acquisitions. Investcorp’s analysis on operational improvements making an impact on exit multiples/ firm value fits into this decision making process.
Some questions I considered coming out of the panel:
Growth: Depending on the nature of the industry, and the cash at hand, what would encourage companies to pursue market share growth as a strategy? How are companies allocating resources to strategies that have a longer incubation time for results?
Risk Taking: How are companies deciding on change management risks in the current economic context?
Know Thy Customer: Given that customer segmentation is expected to lead to actionable marketing activities, how would it change in the changed economic context? While investing in understanding the customer may take a hit, how are companies evaluating situations where cutbacks here will hurt more than add value?
One Chart, One Slide to Show It All
Taking these questions and thoughts further, you really come to a simple X-Y bubble chart that lists points in the company’s value chain starting from financing to customer touch points on one scale, and profitability of investments on another, with bubble size being a function of risk.
Corporate Finance: A Decision Making Template
The decision making template behind this evaluation process could be:
1. What is the customer impact? One parameter to consider could be- would this improve customer “stick”? This helps evaluate customer acquistion programs, given that margins are under pressure and most companies are looking to increase volumes.
2. Do we have cash for change?
3. What is the profitability *profile* of each investment? E.g. Do certain improvements investments have "long tail" returns?
4. What is the exit strategy for this change project?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
To tackle the question of creating value in the current economic context, the panelists considered various tactics like evaluating the purchasing power of the customer, to benchmarking various activities of the organization. This can lead to evaluating options like changes to distribution strategy, or even product rationalization.
A Managing Director at Fenway Partners, who has been through the 2001-02 downturn, pointed out that you may save capital, but you are then faced with the challenge of deploying it.
He ventured three capital deployment options- buy debt at a discount, invest in organic growth by looking at operational investments, and invest in equity acquisitions. Investcorp’s analysis on operational improvements making an impact on exit multiples/ firm value fits into this decision making process.
Some questions I considered coming out of the panel:
Growth: Depending on the nature of the industry, and the cash at hand, what would encourage companies to pursue market share growth as a strategy? How are companies allocating resources to strategies that have a longer incubation time for results?
Risk Taking: How are companies deciding on change management risks in the current economic context?
Know Thy Customer: Given that customer segmentation is expected to lead to actionable marketing activities, how would it change in the changed economic context? While investing in understanding the customer may take a hit, how are companies evaluating situations where cutbacks here will hurt more than add value?
One Chart, One Slide to Show It All
Taking these questions and thoughts further, you really come to a simple X-Y bubble chart that lists points in the company’s value chain starting from financing to customer touch points on one scale, and profitability of investments on another, with bubble size being a function of risk.
Corporate Finance: A Decision Making Template
The decision making template behind this evaluation process could be:
1. What is the customer impact? One parameter to consider could be- would this improve customer “stick”? This helps evaluate customer acquistion programs, given that margins are under pressure and most companies are looking to increase volumes.
2. Do we have cash for change?
3. What is the profitability *profile* of each investment? E.g. Do certain improvements investments have "long tail" returns?
4. What is the exit strategy for this change project?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
On Private Equity: Scott Schoen, THL
Scott Schoen started off by describing a simple structure for the fundamentals of PE.
The THL Perspective of Doing the Deal
Sourcing (involves valuations and generating deal flow for inside due diligence)
-> Financing (due diligence is key)
-> Operations (improvements are key)
-> Strategic Exits (options include secondary PE markets)
Inside due diligence consists of identifying the
level of control required of the target,
leverage for the deal,
operational value add opportunities.
Financing constructs considered include PIPE structures where the private equity firm can acquire control with about 30-% to 35% of equity without paying for control. Financing sources can be broken down into existing investors, the government, and Mergers & Acquisitions. Each of these requires various strategies to be in play.
Manifestations of the Current Economic Context
Scott Schoen’s key points about the manifestations of the current economic context:
Sizing the problem: The economic contraction is a function of leverage. It impacts US Financial Sector assets totaling $60 trillion on the US balance sheet, and also impacts the leverage ratio (40:1) of financial institutions. As an example, he pointed out that the total CLO transactions in Q4 2008 were $0.
Return to basics: The contraction will lead to companies looking for cost savings; however, one company’s cost savings are another company’s lost revenue. In terms of the private equity industry, this translates to a return to the basics- better covenants and refinancing of senior loans.
Restructuring: There are two ways to deal with distress scenarios. Either negotiate amendments when faced with defaults, or go into a court process as lenders are fragmented, with banks as senior lenders.
Rates and The PE Deal: New rates at LIBOR +2.5% to 8.5% are causing value to seep through the PE deal.
The Equity Overhang: The private equity industry equity overhang of $400 billion will likely go into mid market private equity transactions
LP Asset Allocation: Limited Partners have capital allocation challenges to deal with- these can be deduced from the equity overhang. A $10 billion fund that is allocating 5% in private equity needs $1 billion in investments as money comes back at a certain pace.
It would be interesting to evaluate the strategies that GPs, LPs and lenders are considering to find returns across the process. Given the willingness to consider PIPE transactions, would PE firms begin behaving like hedge funds to manage the huge equity overhang?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
The THL Perspective of Doing the Deal
Sourcing (involves valuations and generating deal flow for inside due diligence)
-> Financing (due diligence is key)
-> Operations (improvements are key)
-> Strategic Exits (options include secondary PE markets)
Inside due diligence consists of identifying the
level of control required of the target,
leverage for the deal,
operational value add opportunities.
Financing constructs considered include PIPE structures where the private equity firm can acquire control with about 30-% to 35% of equity without paying for control. Financing sources can be broken down into existing investors, the government, and Mergers & Acquisitions. Each of these requires various strategies to be in play.
Manifestations of the Current Economic Context
Scott Schoen’s key points about the manifestations of the current economic context:
Sizing the problem: The economic contraction is a function of leverage. It impacts US Financial Sector assets totaling $60 trillion on the US balance sheet, and also impacts the leverage ratio (40:1) of financial institutions. As an example, he pointed out that the total CLO transactions in Q4 2008 were $0.
Return to basics: The contraction will lead to companies looking for cost savings; however, one company’s cost savings are another company’s lost revenue. In terms of the private equity industry, this translates to a return to the basics- better covenants and refinancing of senior loans.
Restructuring: There are two ways to deal with distress scenarios. Either negotiate amendments when faced with defaults, or go into a court process as lenders are fragmented, with banks as senior lenders.
Rates and The PE Deal: New rates at LIBOR +2.5% to 8.5% are causing value to seep through the PE deal.
The Equity Overhang: The private equity industry equity overhang of $400 billion will likely go into mid market private equity transactions
LP Asset Allocation: Limited Partners have capital allocation challenges to deal with- these can be deduced from the equity overhang. A $10 billion fund that is allocating 5% in private equity needs $1 billion in investments as money comes back at a certain pace.
It would be interesting to evaluate the strategies that GPs, LPs and lenders are considering to find returns across the process. Given the willingness to consider PIPE transactions, would PE firms begin behaving like hedge funds to manage the huge equity overhang?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Saturday, March 14, 2009
Richard Friedman’s perspective on the Private Equity industry
Richard Friedman’s address (Head of Merchant Banking at Goldman Sachs) turned out to be a whirlwind tour of what he’s seen of the private equity industry over the years, growing from a billion dollars in size in 1991 with 4 key firms to 545 billion dollars in size in 2008 with over 200 major funds. As usual, the barrage of information spawned many questions.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Some things he touched upon:
1> Anticyclical behavior of the industry
The 2001-2003 period had modest activity due to the economic conditions, however, the returns from the investments then varied from 25% to a 100%.
2> Trends in valuations
Alluding to the valuations being optimistic, almost driven by multiples of peak earnings instead of multiples of earnings.
3> Targeting large companies
Specifically points included financing, the 2001-2003 downturn’s lag effects, and compensation limits on management.
Evaluating (read critically questioning) these 3 trends is an interesting exercise, and got me thinking about corporate governance and leadership. More about it in my post on “Private Equity Firms and Large Company Acquisitions”.
The period from 1989 to 1999 saw investments totaling $250 billion, while the 18 month period from 2005 to July 2007 saw 1.2 Trillion dollars worth of investments.
Encouraging an idea out of left field, at the risk of sounding flippant, could you call this the biggest bailout (read takeover, or turnaround, or even protection) of American Enterprise in history? More about it in my blog on “Is Private Equity The American Industry that protects American Enterprise?”
Think About The Future
Equally interesting were thoughts about the future. Where do we go from here?
Bargain Hunting for Investments
Just like the 2001-2003 period, there are bargain purchase opportunities. However, any change of direction from the fund’s stated strategy would concern the LPs.
This leads to a set of follow up thoughts:
What more can GPs do to account for bankruptcy risk?
Does the answer lie in more robust valuation scenarios (akin to the bank stress tests) and due diligence?
Given the increased riskiness of investments, would PE funds start looking like VC funds?
How can GPs and CFOs of the funds work more closely with LPs?
What kind of downside protection can a GP provide an LP?
How do funds deal with liquidity challenges?
Does the senior loan market now resemble that in the 60s and the 70s?
If necessary, how would GPs buy senior debt in their portfolio companies and still ensure incentives are aligned correctly?
How would CFOs of funds categorize their LPs to get buy in on any style drift, assuming that’s a risk they are willing to take, and that there are funds available?
How would your approach be different when it comes to large institutional investors?
Managing Organizations
Given the economic environment, management teams may begin to think that they don’t have the incentives anymore for change. Persistent communication to align the investment perspective and the managers on the ground is a quick start- however; would it make sense to explore other initiatives like team building?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Trends in Credit Markets by Edward Altman
Dr. Altman presented an interesting perspective on economic conditions in 2009- backed with the kind of data and research that gets you thinking critically at the economic data you see around you.
Some quick notes on topics touched upon:
1> The High Yield Bond OAS (yield to maturity spreads over treasuries), which were at 260 bps in June 2007, had jumped to 2046 bps in December 2008.
2> Spread index creation, based on weighted averages of spreads, and dropping of companies that go bankrupt, reduces the spreads.
3> Default rates could be a leading indicator of the health of corporate bond market, however, CDS does not define a distress exchange as a default event.
4> The size of the distress debt market, compared to that of the high yield debt market is an interesting economic trend.
5> Hedge funds will find it difficult to make money as the default rate rises.
6> Moody’s downgrade of 50% of CLOs in the $100 billion market is based on a 40% recovery rate on defaults.
7> In 2009, more than 12 companies went bankrupt with over 1 billion in liabilities.
8> Distressed exchange market in 2008 more in value than the the bond market since 1984 (IBM issuance of the convertible bond to finance an acquistion).
Points to note about the credit markets trends:
1> Low equity and debt volatility till summer 07. The VIX fell to 10.
2> Low default rates and high recoveries.
3> Distress debt control investing- loan to own.
4> Rescue financing- essentially a privatization of bankruptcy.
5> Volatility a measure of downside distribution of asset values.
6> Now, volatility high and liquidity low.
What patterns do you see?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Some quick notes on topics touched upon:
1> The High Yield Bond OAS (yield to maturity spreads over treasuries), which were at 260 bps in June 2007, had jumped to 2046 bps in December 2008.
2> Spread index creation, based on weighted averages of spreads, and dropping of companies that go bankrupt, reduces the spreads.
3> Default rates could be a leading indicator of the health of corporate bond market, however, CDS does not define a distress exchange as a default event.
4> The size of the distress debt market, compared to that of the high yield debt market is an interesting economic trend.
5> Hedge funds will find it difficult to make money as the default rate rises.
6> Moody’s downgrade of 50% of CLOs in the $100 billion market is based on a 40% recovery rate on defaults.
7> In 2009, more than 12 companies went bankrupt with over 1 billion in liabilities.
8> Distressed exchange market in 2008 more in value than the the bond market since 1984 (IBM issuance of the convertible bond to finance an acquistion).
Points to note about the credit markets trends:
1> Low equity and debt volatility till summer 07. The VIX fell to 10.
2> Low default rates and high recoveries.
3> Distress debt control investing- loan to own.
4> Rescue financing- essentially a privatization of bankruptcy.
5> Volatility a measure of downside distribution of asset values.
6> Now, volatility high and liquidity low.
What patterns do you see?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Middle Market LBO and Changing Capital Structures
The panelists were seeing transactions in the middle market, but these transactions had some sort of distress component. The insight here was about the ownership structure of mid market firms, which had entrepreneurs with strong stakes. Entrepreneurs running firms with strong fundamentals did not have much of an incentive to sell. Quoting a panelist- why sell when you can make as much money and still own the company?
Some numbers from the end of Q1:
The panel had seen loans being sold at a discount of upto 90%. LIBOR floor was at 3.5% and mezzanine coupons were at 15% to 17%. Debt multiples, in terms of EBITDA, for first lien were around 2.5, for second lien, around 3.3 and for subordinate debt, around 4.3. Mezzanine debt had more senior debt than ever.
Transaction multiples had held, however, leverage multiples had gone down, while equity component had gone up. The more complicated structures cause deals to take longer to pull off.
Banks were interested in private transactions, as they provided rates better than LIBOR + 500 bps, and were delivering via mezzanine and equity.
There was an interesting demonstration of over-equalization of seller and buyer expectations with supply of capital as a key factor. It would be interesting to see a similar analysis with supply of transactions as the key factor.
It was pointed out that transaction multiples had held:
1> Is ita real estate like effect in the relatively less liquid middle market where the selling price of the last house sold on the block sets the price for future sales? Or.
2> Are mid market firms with capital left to invest crowding around fewer transactions?
3> Banks investing in private transactions would be an important source of liquidity- how many of these investments were really follow up transactions to investments already made?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Some numbers from the end of Q1:
The panel had seen loans being sold at a discount of upto 90%. LIBOR floor was at 3.5% and mezzanine coupons were at 15% to 17%. Debt multiples, in terms of EBITDA, for first lien were around 2.5, for second lien, around 3.3 and for subordinate debt, around 4.3. Mezzanine debt had more senior debt than ever.
Transaction multiples had held, however, leverage multiples had gone down, while equity component had gone up. The more complicated structures cause deals to take longer to pull off.
Banks were interested in private transactions, as they provided rates better than LIBOR + 500 bps, and were delivering via mezzanine and equity.
There was an interesting demonstration of over-equalization of seller and buyer expectations with supply of capital as a key factor. It would be interesting to see a similar analysis with supply of transactions as the key factor.
It was pointed out that transaction multiples had held:
1> Is ita real estate like effect in the relatively less liquid middle market where the selling price of the last house sold on the block sets the price for future sales? Or.
2> Are mid market firms with capital left to invest crowding around fewer transactions?
3> Banks investing in private transactions would be an important source of liquidity- how many of these investments were really follow up transactions to investments already made?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Venture Capital: Navigating the Current Landscape
The panel started off, interestingly, examining the fundamentals of venture capital investing. Any potential investment must demonstrate compelling value and a feasible exit strategy. The panelists talked about how returns in venture capital are seen in bursts, and average out over time. One panelist talked about a batch mate in business school (early 1980s), now a leader of a successful universal banking group, who forecasted that the SnP500 returns would be greater than that of the venture capital industry that decade. The batch-mate turned out to be right.
The panelist also talked about some of their areas of investments- mobile computing, video games and personal genomics.
At lunch, Jim Long mentioned how important it is to bootstrap your venture.
Given the Sequoia presentation from 2008, it was interesting to see panelists responding to the crisis with a “return to fundamentals” theme.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
The panelist also talked about some of their areas of investments- mobile computing, video games and personal genomics.
At lunch, Jim Long mentioned how important it is to bootstrap your venture.
Given the Sequoia presentation from 2008, it was interesting to see panelists responding to the crisis with a “return to fundamentals” theme.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Fundraising and Capital Flows
A diverse panel, consisting of
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Sunday, February 01, 2009
On Investing in Financial Services: J. Christopher Flowers, J. C. Flowers & Co.
Some thoughts from a J. C. Flowers’ talk below, even though a little dated. He has been in the middle of events that have defined this decade, and could possibly impact this century.
Investment Strategy
J. C. Flowers has frequently executed a strategy of investing in financial services companies where the government is an important player. His theme was that government assisted deals seem to have no downside, even if there may be a capped upside, like the Shinsei Bank deal.
Investment Structure
He create a silo structure that can take 100% control of banks and that separates the acquired bank from the investing firm’s other investments. Flowers executed this by acquiring 9th smallest national bank. He has utilized this strategy to take 24% control in a German commercial real estate property lender.
Central Banks Around the World
His take on central banks- BOJ was moving slowly, Ireland may well go the way of the UK, and that the ECB has been hammered by national interest. These thoughts, seen in light of calls for a concerted global action by economists, as well as in light of efforts by Bank of Ireland to avoid directly bailing out the banks, caught your attention.
The Usual Suspects… Err… Questions.
Some questions arise:
1. How do both the investing strategy and structure account for the regulatory risk of investing in financial services companies? Could the market/ industry of the acquired player disappear? Say CDOs are regulated away? A more operational question is how do you deal with a government that is trying to force you out? That’s something that Flowers may be experiencing in Germany.
2. Given the governments may not want to continue their assistance of financial services for long, what kind of strategies would he need in place to exit with returns?
3. Regulatory capture is a separate line of thought- is that relevant here?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Investment Strategy
J. C. Flowers has frequently executed a strategy of investing in financial services companies where the government is an important player. His theme was that government assisted deals seem to have no downside, even if there may be a capped upside, like the Shinsei Bank deal.
Investment Structure
He create a silo structure that can take 100% control of banks and that separates the acquired bank from the investing firm’s other investments. Flowers executed this by acquiring 9th smallest national bank. He has utilized this strategy to take 24% control in a German commercial real estate property lender.
Central Banks Around the World
His take on central banks- BOJ was moving slowly, Ireland may well go the way of the UK, and that the ECB has been hammered by national interest. These thoughts, seen in light of calls for a concerted global action by economists, as well as in light of efforts by Bank of Ireland to avoid directly bailing out the banks, caught your attention.
The Usual Suspects… Err… Questions.
Some questions arise:
1. How do both the investing strategy and structure account for the regulatory risk of investing in financial services companies? Could the market/ industry of the acquired player disappear? Say CDOs are regulated away? A more operational question is how do you deal with a government that is trying to force you out? That’s something that Flowers may be experiencing in Germany.
2. Given the governments may not want to continue their assistance of financial services for long, what kind of strategies would he need in place to exit with returns?
3. Regulatory capture is a separate line of thought- is that relevant here?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Private Equity Case: Dialogic Carve Out from Intel
Given my own experience with a Citigroup company that underwent a carve-out and an acquisition, I was looking forward to insights from this panel of heavyweights.
The Investment Rationale, Diligence and Terms
The comprehensive discussion started off by covering the rationale for a carve-out. One could be the impact of the technology inflexion curve, which forces revenue contraction. The challenges lie in the due diligence- the new entity requires an operating infrastructure to be built around the business- and venture capital like agreements on the term sheet conditions around downside protection- like redemption rights. Factors like restructuring management also need to be considered as they impact investment risk. In the Intel- Dialogic deal, intellectual property discussions were also critical.
Exit Strategy
Given this context, the exit strategy pitch to the investment committee is also critical. The right expectations need to be set, from whom to sell to- IPO vs. general sale- to sale value. This is especially important when the investor would like flexibility on freeing up cash if necessary.
This raises interesting investing questions:
1> Investment Failure Rates
There are various ways to slice and dice the investment portfolio: have firms considered “failure” rates of different types of deals, e.g. a carve out vs. a public company acquisition, as a factor in their decision making?
2> Portfolio Synergies
Do investment committees consider synergies across their investment portfolio as a factor in deal making? If so, what kind of policy should govern such a process? Note: Dealmakers sometime tend to think of synergy as finding efficiencies by acquiring competitors and consolidating market share. There is more to synergies- it pays to think like an investment professional here.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
The Investment Rationale, Diligence and Terms
The comprehensive discussion started off by covering the rationale for a carve-out. One could be the impact of the technology inflexion curve, which forces revenue contraction. The challenges lie in the due diligence- the new entity requires an operating infrastructure to be built around the business- and venture capital like agreements on the term sheet conditions around downside protection- like redemption rights. Factors like restructuring management also need to be considered as they impact investment risk. In the Intel- Dialogic deal, intellectual property discussions were also critical.
Exit Strategy
Given this context, the exit strategy pitch to the investment committee is also critical. The right expectations need to be set, from whom to sell to- IPO vs. general sale- to sale value. This is especially important when the investor would like flexibility on freeing up cash if necessary.
This raises interesting investing questions:
1> Investment Failure Rates
There are various ways to slice and dice the investment portfolio: have firms considered “failure” rates of different types of deals, e.g. a carve out vs. a public company acquisition, as a factor in their decision making?
2> Portfolio Synergies
Do investment committees consider synergies across their investment portfolio as a factor in deal making? If so, what kind of policy should govern such a process? Note: Dealmakers sometime tend to think of synergy as finding efficiencies by acquiring competitors and consolidating market share. There is more to synergies- it pays to think like an investment professional here.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
On Private Equity: G.M.C. Fisher, KKR & Company
G.M.C. Fisher talked about his experience within the Private Equity industry at KKR & Co. His opening theme was that Cash Is King- the cornerstone of the Private Equity industry. It also dovetails with my own experience of dealing with and highlighting strategic risks with a supplier with cash issues that filed for chapter 11 bankruptcy.
KKR & Co.’s Integrated Model
He then focused on the firm’s integrated model of value creation. As a senior advisor, he believes advisors had a great deal of flexibility at KKR. The portfolio committee focuses on operational improvements and the investment committee focused on deal making. There is also an independent audit committee in place. The Capstone team at KKR performs the strategy function.
The key component of the operations strategy is the 100 day plan. Quarterly reviews serve as reality checks against overcommittment by an eager management team. Business transformation is quicker and easier in this context. Similar to conglomerates, the role of a Chief Talent or HR office is critical in a private equity company.
Fisher talked about the PanAmSat deal where Carlyle and KKR formed a consortium. In a portfolio company, the focus is on the assets of the company, and planning debt maturities (requires modeling at the tranche level).
The Questions
This leads to some questions about the investing process:
1. What would be the criteria for dropping a deal after the screening process indicates that the target would make an effective standalone investment? What would make KKR walk away from an opportunity where the numbers from the screening and the models indicate a strong investment opportunity?
2. Do PE companies increase employment?
The talk made me wonder how my company’s supplier, who I believed needed to be dropped from the supplier list, would flow through this organization structure as an investment. Are there companies out there you believe will gain from a private equity acquisition?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
KKR & Co.’s Integrated Model
He then focused on the firm’s integrated model of value creation. As a senior advisor, he believes advisors had a great deal of flexibility at KKR. The portfolio committee focuses on operational improvements and the investment committee focused on deal making. There is also an independent audit committee in place. The Capstone team at KKR performs the strategy function.
The key component of the operations strategy is the 100 day plan. Quarterly reviews serve as reality checks against overcommittment by an eager management team. Business transformation is quicker and easier in this context. Similar to conglomerates, the role of a Chief Talent or HR office is critical in a private equity company.
Fisher talked about the PanAmSat deal where Carlyle and KKR formed a consortium. In a portfolio company, the focus is on the assets of the company, and planning debt maturities (requires modeling at the tranche level).
The Questions
This leads to some questions about the investing process:
1. What would be the criteria for dropping a deal after the screening process indicates that the target would make an effective standalone investment? What would make KKR walk away from an opportunity where the numbers from the screening and the models indicate a strong investment opportunity?
2. Do PE companies increase employment?
The talk made me wonder how my company’s supplier, who I believed needed to be dropped from the supplier list, would flow through this organization structure as an investment. Are there companies out there you believe will gain from a private equity acquisition?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Panel: Venture Capital: “If it ain’t broke…” Does the VC Model Need Fixing?
The discussion focused on the parameters within which the VC industry currently operates
A return to fundamentals
The discussion kicked off with a return to fundamentals:
1> Most venture capital firms are not setup to make small investments
2> Venture capital firms are more like asset managers
3> Deal making is not easy: A deal like that of EqualLogic was hard work for all parties involved
4> The venture capital business is fundamentally not about fundamental research for revolutionary technologies, but about applying technology
5> Depending on the industry, the average holding period can be up to 9 years
6> As the market for the pre-IPO company matures, it should grow larger, providing the opportunity for late stage venture capital firms.
7> Exit strategies are critical to the model. Is there a vibrant IPO market? Are there private company sales opportunities?
Investing during the economic downturn
The panelist opinion was that the quality of business plans and management teams gets better as the economy goes down. The panelists emphasized that they are being extremely selective; they are not into throwing 50 bets at the solar power industry.
A panelist pointed out that the CEOs of their portfolio firms were upset by the Sequoia deck. The economic downturn, though, has led them to revisit their breakeven analysis.
Economic cycles and the industry- a perspective
A panelist had an interesting perspective on the economic downturn- the VC firm sells a company to Microsoft in the good times -> Microsoft cuts products and jobs in the bad times -> the resources are back in the VC fold working on the next product.
Venture Capital Fund Management
Funds are structured as financial managers who can find good business managers, as opposed to operational managers making funding decisions.
In January 2009, Kleiner Perkins, raised a so-called “annex fund,” or reserve fund it can tap to support companies it has already backed to help ensure they get through the downturn.
http://venturebeat.com/2009/01/14/kleiner-perkins-forced-to-reach-out-to-new-investors-unheard-of/
Outside of the one off hits, a panelist pointed out that returns in the 4x range would be rare in exits. Valuations were down 50%, B and C round valuations were down 20% and 30 % respectively. Another panelist stated that the venture capital industry was saved from a sever flight of capital by the buyout collapse.
Some the questions that arise:
1. Do lower valuations imply a longer time to complete transactions, and require a better understanding of the potential investment’s core business?
2. Would there be a shakeout in the industry that favors more late stage firms that have strong networks with large, potentially private companies? Would the shakeout lead to a reduction of the number of multistage firms?
3. Would late stage venture capital firms resort to private investment in public equity (small cap companies)? Even at the risk of serious strategy drift?
4. Given the odds of hitting the ball out of the ballpark (and I am not even talking about the odds of innovation), how should a venture capital firm get more selective?
5. Given the context of the Kleiner Perkins Annex fund, would a fund consider trading extensively in a secondary private market only when it is considering liquidating? Would partial portfolio/ strip sales be a serious option? Would some sort of a CDO like market structure be useful in the venture capital industry?
6. How are funds helping the LPs? Is it just via managing the drawdowns?
7. Are more LPs checking on estimates on deal flow and deal sizes to assess the impact of the economic downturn?
8. Are investment charters of old portfolios being modified to provide more flexibility to the venture capital firms?
9. How frequently are LPs assessing their asset allocations strategies and communicating with funds to execute revisions?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
A return to fundamentals
The discussion kicked off with a return to fundamentals:
1> Most venture capital firms are not setup to make small investments
2> Venture capital firms are more like asset managers
3> Deal making is not easy: A deal like that of EqualLogic was hard work for all parties involved
4> The venture capital business is fundamentally not about fundamental research for revolutionary technologies, but about applying technology
5> Depending on the industry, the average holding period can be up to 9 years
6> As the market for the pre-IPO company matures, it should grow larger, providing the opportunity for late stage venture capital firms.
7> Exit strategies are critical to the model. Is there a vibrant IPO market? Are there private company sales opportunities?
Investing during the economic downturn
The panelist opinion was that the quality of business plans and management teams gets better as the economy goes down. The panelists emphasized that they are being extremely selective; they are not into throwing 50 bets at the solar power industry.
A panelist pointed out that the CEOs of their portfolio firms were upset by the Sequoia deck. The economic downturn, though, has led them to revisit their breakeven analysis.
Economic cycles and the industry- a perspective
A panelist had an interesting perspective on the economic downturn- the VC firm sells a company to Microsoft in the good times -> Microsoft cuts products and jobs in the bad times -> the resources are back in the VC fold working on the next product.
Venture Capital Fund Management
Funds are structured as financial managers who can find good business managers, as opposed to operational managers making funding decisions.
In January 2009, Kleiner Perkins, raised a so-called “annex fund,” or reserve fund it can tap to support companies it has already backed to help ensure they get through the downturn.
http://venturebeat.com/2009/01/14/kleiner-perkins-forced-to-reach-out-to-new-investors-unheard-of/
Outside of the one off hits, a panelist pointed out that returns in the 4x range would be rare in exits. Valuations were down 50%, B and C round valuations were down 20% and 30 % respectively. Another panelist stated that the venture capital industry was saved from a sever flight of capital by the buyout collapse.
Some the questions that arise:
1. Do lower valuations imply a longer time to complete transactions, and require a better understanding of the potential investment’s core business?
2. Would there be a shakeout in the industry that favors more late stage firms that have strong networks with large, potentially private companies? Would the shakeout lead to a reduction of the number of multistage firms?
3. Would late stage venture capital firms resort to private investment in public equity (small cap companies)? Even at the risk of serious strategy drift?
4. Given the odds of hitting the ball out of the ballpark (and I am not even talking about the odds of innovation), how should a venture capital firm get more selective?
5. Given the context of the Kleiner Perkins Annex fund, would a fund consider trading extensively in a secondary private market only when it is considering liquidating? Would partial portfolio/ strip sales be a serious option? Would some sort of a CDO like market structure be useful in the venture capital industry?
6. How are funds helping the LPs? Is it just via managing the drawdowns?
7. Are more LPs checking on estimates on deal flow and deal sizes to assess the impact of the economic downturn?
8. Are investment charters of old portfolios being modified to provide more flexibility to the venture capital firms?
9. How frequently are LPs assessing their asset allocations strategies and communicating with funds to execute revisions?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Consumer Behavior and Robert Pittman on Investing in Media
Consumer Behavior
Robert Pittman had some interesting insights on consumer behavior. He provided an “action oriented” view of Maslow’s hierarchy by citing convenience and branding as key components of a consumer’s decisionmaking.
He defined convenience as physical, tangible productivity tools and branding as a means to prevent switching. Applying that to internet tools/ properties/ networks, the key trade off is effectively the relative “delta” of convenience vs. switching costs.
Advertising channels and consumer behavior
Robert pointed out that the internet is not killing TV, its really killing newspapers. Some thoughts put forth around this idea:
1> Pricing: He compared the cost per thousand impressions between TV/ radio and newspapers. He then questioned the rationale for the market difference.
2> Change in spend across channels: He presented data that highlighted the marketing spend across newspapers, yellow pages and the internet, with newspapers currently garnering more than twice the ad spend on either the internet or the yellow pages. Change in marketing tactics to adjust to the internet as a medium has not been drastic. Given the theme, this presents a tangible opportunity in the internet media segment.
3> Nature of advertising channels: The cable TV industry is larger than the broadcast TV industry; however, the cable TV industry is quite fragmented. This creates a difference in how advertisers approach these two channels.
Some takeaways
1> Critically analyze the value of internet properties
Is the internet properties’ lack of stick just a function of low switching costs?
Do internet properties really make us more productive or more effective as they interweave into our daily life?
2> Expect unrelenting, inexorable change
Citing the fact that TV show ratings lead their revenue impact, Robert sees a similar trend in the internet media. The internet is truly impacting consumers and consumer facing companies. Adapting to this change in consumer behavior will define which companies fail and which survive.
The talk led to questions, as usual:
1> The web and TV: How do we categorize the impact of online TV series viewers on series like The Sarah Connor Chronicles and Dollhouse? The former got the axe despite as many as 7 million viewers following the series online.
2> Channel relationships and Ad spend: Are the industry structures in place for the media planning industry to move quickly, seamlessly and effortlessly across the various advertising channels? Is it just a function of channel relationships, or it is also a function of the industry still being in the process of wrapping their arms around opportunities in the “new media” segment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Robert Pittman had some interesting insights on consumer behavior. He provided an “action oriented” view of Maslow’s hierarchy by citing convenience and branding as key components of a consumer’s decisionmaking.
He defined convenience as physical, tangible productivity tools and branding as a means to prevent switching. Applying that to internet tools/ properties/ networks, the key trade off is effectively the relative “delta” of convenience vs. switching costs.
Advertising channels and consumer behavior
Robert pointed out that the internet is not killing TV, its really killing newspapers. Some thoughts put forth around this idea:
1> Pricing: He compared the cost per thousand impressions between TV/ radio and newspapers. He then questioned the rationale for the market difference.
2> Change in spend across channels: He presented data that highlighted the marketing spend across newspapers, yellow pages and the internet, with newspapers currently garnering more than twice the ad spend on either the internet or the yellow pages. Change in marketing tactics to adjust to the internet as a medium has not been drastic. Given the theme, this presents a tangible opportunity in the internet media segment.
3> Nature of advertising channels: The cable TV industry is larger than the broadcast TV industry; however, the cable TV industry is quite fragmented. This creates a difference in how advertisers approach these two channels.
Some takeaways
1> Critically analyze the value of internet properties
Is the internet properties’ lack of stick just a function of low switching costs?
Do internet properties really make us more productive or more effective as they interweave into our daily life?
2> Expect unrelenting, inexorable change
Citing the fact that TV show ratings lead their revenue impact, Robert sees a similar trend in the internet media. The internet is truly impacting consumers and consumer facing companies. Adapting to this change in consumer behavior will define which companies fail and which survive.
The talk led to questions, as usual:
1> The web and TV: How do we categorize the impact of online TV series viewers on series like The Sarah Connor Chronicles and Dollhouse? The former got the axe despite as many as 7 million viewers following the series online.
2> Channel relationships and Ad spend: Are the industry structures in place for the media planning industry to move quickly, seamlessly and effortlessly across the various advertising channels? Is it just a function of channel relationships, or it is also a function of the industry still being in the process of wrapping their arms around opportunities in the “new media” segment?
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist/ speaker interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.
Thursday, January 29, 2009
Financial Transactions, Trust and Keynesian "Animal Spirits"
I read an interesting article by Shiller on how to facilitate credit markets' recovery:
http://online.wsj.com/article/SB123302080925418107.html#printMode
In a nutshell, the theme: increase government support for the credit markets and also increase the size of the stimulus.
While Stiglitz's article on the Bretton Woods moment may make you consider whether time is circular, Shiller's article suggests trust is an absolute for any economic system to continue humming as usual, and then suggests targeting that same absolute for rebuilding a specific, battered, economic system.
In my previous blog below,
http://randomjunkyramblings.blogspot.com/2009/01/stiglitz-wrote-interesting-article-in.html
I referenced an Op Ed on a terrorist attack that wrapped up with "Stimulus doesn't have to be just economic". The theme in this Op Ed article was that it takes more than just funds to restore the spirit of an economic engine.
Looking from this lens, could Schiller's suggestion of expanded government stimuli be a case of prescribing Aspirin for headaches and heart attacks? Is Apirin really a miracle cure? If not, what are the alternatives? Is there no alternative?
Could expanded government stimuli really be a "necessary" condition for other factors to initiate an economic recovery?
What do you think?
http://online.wsj.com/article/SB123302080925418107.html#printMode
In a nutshell, the theme: increase government support for the credit markets and also increase the size of the stimulus.
While Stiglitz's article on the Bretton Woods moment may make you consider whether time is circular, Shiller's article suggests trust is an absolute for any economic system to continue humming as usual, and then suggests targeting that same absolute for rebuilding a specific, battered, economic system.
In my previous blog below,
http://randomjunkyramblings.blogspot.com/2009/01/stiglitz-wrote-interesting-article-in.html
I referenced an Op Ed on a terrorist attack that wrapped up with "Stimulus doesn't have to be just economic". The theme in this Op Ed article was that it takes more than just funds to restore the spirit of an economic engine.
Looking from this lens, could Schiller's suggestion of expanded government stimuli be a case of prescribing Aspirin for headaches and heart attacks? Is Apirin really a miracle cure? If not, what are the alternatives? Is there no alternative?
Could expanded government stimuli really be a "necessary" condition for other factors to initiate an economic recovery?
What do you think?
Saturday, January 24, 2009
Financial Markets, Economic Crises And Global Co-ordination
Stiglitz wrote an interesting article in Newsweek, titled "Markets Can't Rule Themselves"***: http://www.newsweek.com/id/177447
The crux of the article is Stiglitz calling the current crisis a Bretton Woods moment. The article is a great read as it makes you pause and look carefully at the options the current administration has to solve the economic crisis. It gets you thinking about "boundary values" of the options being evaluated in the current economic scenario- a process that leads to more felicity in thinking about solutions. It certainly got me thinking- hence this post.
The Story So Far
So what has been done already toward managing risk in increasingly globalized markets? Some of you may be familiar with Basel II. Basel II (http://www.bis.org/publ/bcbs107.htm) could be called a move toward a more effective risk management approach, consistent across countries.
Where Do Stiglitz's Ideas in the Article Lead Us?
I have two impromptu thoughts on the overall direction of the ideas in the Newsweek article. Note: I am very unhappy to say I am still wrapping my head around these thoughts (read research- data and analysis).
1> Global Co-ordination Becomes One Roof to Shelter All in Implementation?
Perhaps it’s the effect of looking at Van Gogh's Starry Night, but upon reading the idea of managing monetary policy globally , I see visions of an entity called "The United Nations Central, Commercial and Retail Bank of Planet Earth". At the risk of sounding dismissive about the interesting "brainstorming ideas" in Stiglitz’s article, we know the UN has not been consistently effective in each crisis it has encountered.
Thinking through implementing an empowered global financial entity, does a parallel between Stiglitz's idea of a global financial regulatory body, and the structures that global corporations employ when dealing with a diverse portfolio of markets, which includes multiple hypercompetitive markets along with markets that resemble sleepy hamlets, make sense?
Global co-ordination has become increasingly critical for an effective response to global financial crises. However, would a light weight process or protocol that gets central banks in the same room and talking, with control and decision making remaining with central banks as they exist today, be more effective than setting up a "heavyweight" international organization?
Given our experience with the effectiveness of the SEC as a regulatory body, what can an international institution monitoring global financial crises really bring to the table?
For those who track international finance closely, how does such an international governing body impact Mundell's framework? Or should I rephrase to say how Mundell's framework would wreak havoc with any initiative of such an international governing body?
2> To Restrain Or Not to Restrain Innovation, that is the Question?
I get a feeling that Stiglitz is checking if we can put the innovation "genie back in the bottle". Unchecked innovation could be termed the root cause of the current problem and we may need to rein it in. It’s a good thought. However, the laundry list of options considered sounds like we are throwing the baby out with the bathwater.
Are we in danger of over regulating to an extent that it effectively regresses the industry? In some ways, it’s a bit like moving from the Iron Age back into the Stone Age (blame this analogy on reading a bit about Ancient Indian history connected with the Iron Age). Control on the industry is necessary via an improved regulatory framework, but how much, over what, and why?
You might argue that innovation is hardly going to be defeated by knee jerk, reactive over regulation. However, my hypothesis is that a singularity like the current economic crisis is the proverbial butterfly that causes a hurricane half way across the globe.
For those that argue that government regulation can serve as a guiding hand to financial services innovation, does a parallel between the idea of the government playing an active role in guiding financial services innovation, and the research on the impact of MITI in Japan on the Japanese High Tech industry, make sense?
3> A Global Economic Emergency?
If we were to effect some of Stiglitz's ideas- what would governments across the world need to do? Perhaps the ideas in the article need a "global economic emergency" (yes, as I write this, I am thinking- it is one of those Saturdays when the imagination runs wild) to be implementable? Any such effort entails significant, co-ordinated political will across countries and economic regions.
Is it feasible/ possible to pull off the measures like those listed in the article, for a short period of time to solve an immediate problem, and then revert to the "good old ways" with a little less laissez faire?
In Summary: Back to the Future? Guns, Germs and Steel? Alice in Wonderland? A Hundred Years of Solitude?
Playing the devil's advocate again- none my counterpoints account for the unprecedented situation we see here. I am looking at Stiglitz’s ideas, listed in the article, in the context of steady state economic policy and my counterpoints are in the same context.
Now, is the current situation really unprecendented? Are the parameters that tell us so, useful in generating an unprecedented solution?
Are we really looking to rewind time, back to a warm fuzzy place when we were still trying to figure out what the financial system could do for the economy? Is this question already too late? Could Shiva, the destroyer of worlds, the genie from the bottle, already have wiped the slate clean for us to start afresh? To gaze afresh, a bit like Alice, at the fluttering butterfly and imagine ways we could channel its untapped power and find new unintended consequences?
Show Me The Money- Is it all about The Money?
I also got thinking about an article on the Mumbai terror attacks (http://www.nytimes.com/2008/11/29/opinion/29mehta.html), where the writer signs off by saying "Stimulus doesn’t have to be just economic."
What do you think?
Thanks!
*** Posted by Prof. Rosensweig at an alumni macroeconomics message board.
P. S. Key Points of the Stiglitz Article
All ideas in Stiglitz's article, which focus on creating:
- Better monetary policy coordination across the US and Europe
- An internationally coordinated stimulus program
- Global financial regulatory body to help monitor and gauge systemic risk
- Global financial rules on managerial incentives
- A new global reserve currency
- A new system of handling cross-border bankruptcies,
arise out of this fundamental approach. This looks a lot like expanding the "The Gold standard" approach to include bailouts and bankruptcies.
Subscribe to:
Posts (Atom)